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More than 50 years of experience in the investment arena give this canny pro the ability to identify big market trends and the companies that will reap the most rewards from those trends. The nimble Joseph McNay also knows when to put the brakes on—as he did in February 2008, when he cited gold as the single best place to put money. His is a talent that has served clients well through these many years by delivering exceptional performance. His flagship long-short fund is beating the Russell 3000 index this year by a wide margin. We met recently with McNay, 78, founder and chief investment officer of Essex Investment Management, in his Boston office, and found him brimming with ideas.

Barron's:Are you still bullish on gold?

McNay: In the long term, gold is still in a bull market, because most governments are still in financial trouble and printing money, but we are now in a correcting phase. We chose to save the system with a major influx of money which will cause big problems later: an increasing rate of inflation and the risk of hyperinflation—and a major loss in the value of our currency. The only saving grace is that foreign countries, in many cases, are worse off and, consequently, destroying their currencies faster than we are; therefore the dollar on a relative basis appears okay. At some point, we will be forced to go back on a gold standard and at a much higher price.

In the near term, what's your read on the market?

In the short term, the market is slightly overbought, and that shows up in the bull/bear spread [an indication of investor sentiment], which is elevated and bearish. Small-cap relative strength has led the market, and it has turned sharply negative recently—and we are getting a correction in those stocks. Short interest is very low, negativism has evaporated, and that is bearish, near-term.

How long do you think the correction lasts?

We look for a pullback to the 50-day moving average on the S&P 500, which is around 1320, and so it could last a few weeks or a month. The put-call ratio is still low, indicating people are too positive.

"The way I have played Facebook going public is to buy Morgan Stanley, which is the lead underwriter and could make as much as $100 million in the offering." -- Joe McNay
Tracy Powell for Barron's

Why do you rely so much on technical analysis?

It is a way of measuring investors' emotions and their current actions, and it is good for reading extremes. The long-term trend is actually still positive, and going up.

We are in a very tough environment, but we are doing a little better than many might think. The U.S. is more solid than most of the other economies. Japan is a disaster, and Europe is in tough shape and, consequently, the U.S. is more attractive on a relative basis. The U.S. has high unemployment, real estate has been slow to recover, and a recovery will take longer than people think. And the total debt of the federal, state and local governments as a percentage of gross domestic product is the highest since World War II, and is continuing higher.

The U.S. is growing the money supply at a very fast rate, a minimum of 10%. So we have problems, but others' problems are much worse than ours.

How do you view the interest-rate environment?

Short-term interest rates are the lowest in our lives. This is an important consideration in investing: People have to do something with their money, and there is lots of it out there.

If you put it in fixed income and buy anything with longer-term maturities, your risk is enormous—because as interest rates rise, which they will, bond prices will go down. On the other hand, you can put it in very short-term maturities, you won't lose it, but you won't get paid anything either. So it makes common stocks and gold-related investments the most interesting places to invest. You want to be in companies that grow faster than money loses its value, so that you maintain your purchasing power. The aging population, one of my investing themes, wants more income for their investments. So stocks that pay dividends have more appeal. Starting in the late 1960s, companies were rewarded for delivering growth and reinvesting in their businesses, and dividend payouts started going down.

We are entering a period where that is reversing, and the companies that pay dividends are the ones whose stocks are going up, and so more companies will be doing it. We are in the early phases of dividends starting to be increased by major corporations.

I think Apple [AAPL] will do it. Their accumulation of cash is enormous, and the rate of return they are receiving is way down. Corporations have the highest cash levels ever. That sets up some interesting dynamics. We'll have dividend increases, but we will also have buyouts of companies. But there is a negative: Profit margins are at an all-time high and, while that is wonderful, it must be looked at very carefully, because margins could be risky here, and that means there is a greater degree of risk in the 15 times price/earnings ratio that stocks are trading at on average.

What's this mean for a growth-stock investor such as your self?

Growth is where the opportunity is. Small-cap growth, mid-cap growth and large-cap growth stocks are all undervalued.
Microsoftmsft -1.2989972652689152%Microsoft Corp.U.S.: NasdaqUSD43.31
-0.57-1.2989972652689152%
/Date(1425419610649-0600)/
Volume (Delayed 15m)
:
24840582
P/E Ratio
17.32Market Cap
359982101418.838
Dividend Yield
2.863741339491917% Rev. per Employee
728656More quote details and news »msftinYour ValueYour ChangeShort position
[MSFT] is a great example, at 12 times earnings, growing nicely and paying a 2½% dividend. What a fabulous place to have money. Apple is only 10 to 12 times next year's earnings, and it has one of the best growth rates in the world.

The Nasdaq just passed 3000. Does that worry you?

That's low compared to where it was a few years ago.

People said it would never get back to 5000.

We will be technically scared when it does get back to 5000. How long it takes to get there, and how high the earnings are, will make a difference. It also includes Apple, which has the largest market capitalization in the world. But it is still growing. Apple's biggest problem will be its own success. At some point, it will be hard for it to continue to grow. Yet, for the moment, it still has good new products. It can still add to its growth. Apple is one of the largest holdings of my clients.

Joe McNay's Picks...

Recent

Company

Ticker

Price

Microsoft

MSFT

$32.85

Apple

AAPL

585.56

Morgan Stanley

MS

19.47

Zynga

ZNGA

13.06

Comcast

CMCSA

29.80

CBS

CBS

31.51

Walt Disney

DIS

43.46

Time Warner

TWX

35.83

Intuit

INTU

60.18

SVB Financial

SIVB

66.11

Skyworks Solutions

SWKS

28.29

Cavium

CAVM

33.12

Verisk Analytics

VRSK

44.99

Westport Innovations

WPRT

46.90

Clean Energy Fuels

CLNE

19.99

Chart Industries

GTLS

73.61

Fuel Systems Solutions

FSYS

25.81

Golar LNG

GLNG

40.25

Golar LNG Partners

GMLP

36.69

Staar Surgical

STAA

10.27

Regeneron

REGN

115.75

Vivus

VVUS

20.14

Herbalife

HLF

70.75

...And Pans

Oil (per barrel)

$105.11

Source: Bloomberg

Are you excited about Facebook's IPO?

Of course, the answer is yes. In the whole area of content and mobile communications, and everything that is going on over the Internet, Facebook is the most dynamic. It is also opening up opportunities for many, many other specialized companies. The way I have played Facebook going public is to buy
Morgan Stanleyms -1.3107064017660044%Morgan StanleyU.S.: NYSEUSD35.765
-0.475-1.3107064017660044%
/Date(1425419610576-0600)/
Volume (Delayed 15m)
:
6697572
P/E Ratio
11.864238410596027Market Cap
70936286342.0765
Dividend Yield
1.1163829193413342% Rev. per Employee
688622More quote details and news »msinYour ValueYour ChangeShort position
[MS], which is the lead underwriter and could make as much as $100 million in the offering. I have also bought
Zyngaznga 1.293103448275862%Zynga Inc. Cl AU.S.: NasdaqUSD2.35
0.031.293103448275862%
/Date(1425419594138-0600)/
Volume (Delayed 15m)
:
22778212
P/E Ratio
N/AMarket Cap
2115032622.29629
Dividend Yield
N/ARev. per Employee
339435More quote details and news »zngainYour ValueYour ChangeShort position
[ZNGA], the gaming company, which is 12% of Facebook's revenue.

Mobile payments is one of our big themes. Square is a company founded by the same fellow who started Twitter. It is growing dynamically by targeting the 30 million small merchants and craftspeople that have traditionally not accepted credit cards. Square's device is a small cube that fits in the headphone jack of a smartphone, and turns it into a point-of-sale terminal. Square isn't public yet, and so we've focused on
Intuitintu -0.6789623023915687%Intuit Inc.U.S.: NasdaqUSD98.01
-0.67-0.6789623023915687%
/Date(1425419605949-0600)/
Volume (Delayed 15m)
:
971118
P/E Ratio
34.441788526434195Market Cap
27307323065.4071
Dividend Yield
1.0206164523372117% Rev. per Employee
572750More quote details and news »intuinYour ValueYour ChangeShort position
[INTU]. Intuit's GoPayment technology is similar to Square's, and they charge the same transaction fee. About 70% of those that use Intuit's mobile-payment option are new customers that wind up using Intuit's tax products and their QuickBooks accounting software. It is obviously very positive for Intuit. This is a new dynamic to what was already a dynamic growth story. QuickBooks has been taking share against H&R Block and other tax preparers.

We have 200 new issues in line to go public. We have a major new-issue market forming. SVB is an absolute beneficiary of this. They bank a number of small technology companies out on the West Coast, many of which will be going public.

What's another theme?

Big Data.
International Business Machinesibm 0.30533399800598204%International Business Machines Corp.U.S.: NYSEUSD160.97
0.490.30533399800598204%
/Date(1425419604744-0600)/
Volume (Delayed 15m)
:
2633923
P/E Ratio
13.41Market Cap
158622281099.263
Dividend Yield
2.734277902063137% Rev. per Employee
244455More quote details and news »ibminYour ValueYour ChangeShort position
[IBM], for instance, is betting their franchise on analytics, and they are going full bore into it, and it shows you how important they think it is for the future of companies. Social media is creating a huge amount of data, and if it is properly analyzed, it can be extremely useful for marketing and sales. The small-cap stock that we like in this area is
Verisk Analyticsvrsk -0.45916237651314873%Verisk Analytics Inc. Cl AU.S.: NasdaqUSD71.54
-0.33-0.45916237651314873%
/Date(1425419559442-0600)/
Volume (Delayed 15m)
:
385795
P/E Ratio
29.66390041493776Market Cap
11363222517.0813
Dividend Yield
N/ARev. per Employee
246191More quote details and news »vrskinYour ValueYour ChangeShort position
[VRSK]. They've had a franchise in insurance analytics, and now they are moving into health care. In their last two quarters, they've shown acceleration in their health-care business, where there is a lot of room for analytics as well as with electronic medical records.

Anything else?

We are huge in natural gas. We love that trucks are going to be running on natural gas. The leader in engines for natural gas cars and trucks is
Westport Innovations
[WPRT] and we are a major Westport investor. A company called
Clean Energy Fuels
[CLNE] is building the fueling stations for natural gas across the major trucking routes that run through the middle of the U.S. and down to Mexico.

The U.S. is oversupplied in natural gas. We don't even have a place to store it anymore. The faster we are able to switch from coal or gasoline to natural gas, the better for our country. Not only will utilities and truckers be helped, but should this continue it will be very good for the chemical companies as the price of their feedstock goes down. We think there's a good chance oil will go down in price, also.

So, have you been selling oil stocks?

We've cut our position in major oil-exploration stocks a lot. Oil-service companies will see less growth and so they are less interesting.

What about your aging population theme? What are some ways to play that?

The post World War II baby boomers are 60 and older. Their health needs require new treatment, of which their eyes are the most obvious.
Staar Surgicalstaa 13.929618768328446%Staar Surgical Co.U.S.: NasdaqUSD7.77
0.9513.929618768328446%
/Date(1425419610334-0600)/
Volume (Delayed 15m)
:
506706
P/E Ratio
N/AMarket Cap
263620282.056541
Dividend Yield
N/ARev. per Employee
223463More quote details and news »staainYour ValueYour ChangeShort position
[STAA] makes lenses for the eyes and is extremely well-positioned.
Regeneron Pharmaceuticalsregn -1.4996176273778798%Regeneron Pharmaceuticals Inc.U.S.: NasdaqUSD412.165
-6.275-1.4996176273778798%
/Date(1425419601718-0600)/
Volume (Delayed 15m)
:
495036
P/E Ratio
119.28323699421965Market Cap
42939001091.7742
Dividend Yield
N/ARev. per Employee
963951More quote details and news »regninYour ValueYour ChangeShort position
[REGN], a biotech company, makes treatments for serious eye diseases and we like it very, very much.
Elan Pharmaceuticals
[ELN] is one of the great generic drug companies, but they also have the leading product going through the Food and Drug Administration for Alzheimer's. I'm unusually optimistic about this one.

What else?

Weight is a big problem in the U.S., and we own a small biotech company,
Vivusvvus 1.444043321299639%VIVUS Inc.U.S.: NasdaqUSD2.81
0.041.444043321299639%
/Date(1425419608623-0600)/
Volume (Delayed 15m)
:
5726487
P/E Ratio
N/AMarket Cap
287753148.500786
Dividend Yield
N/ARev. per Employee
1165110More quote details and news »vvusinYour ValueYour ChangeShort position
[VVUS], which has an obesity drug that is under consideration by the FDA. Then there's
Herbalifehlf 2.611695137976347%Herbalife Ltd.U.S.: NYSEUSD31.235
0.7952.611695137976347%
/Date(1425419605616-0600)/
Volume (Delayed 15m)
:
1231312
P/E Ratio
8.818696883852692Market Cap
2804345895.75874
Dividend Yield
3.8548024413748796% Rev. per Employee
708371More quote details and news »hlfinYour ValueYour ChangeShort position
[HLF], which sells nutritional supplements. It has a new distribution model, and sales are going up beautifully. It has great cash flow dynamics. Its distributors operate wellness centers, where people head after working out for their protein shakes, and that has resulted in a recurring revenue stream. It is hugely popular in the Hispanic community, and it is using social media.

Pans?

We could be approaching a bubble in some of the Internet-oriented areas. LinkedIn, a social media site that people network on for jobs, looks overpriced at about 90 times earnings. I like the yield on utilities, but they are up in price and aren't growing that fast.